A doctor assessing the health of two patients—one overweight and the other extremely thin, neither having eaten anything in recent days—may come to the wrong conclusion, if based only on appearances. The doctor needs to ask the right questions, analyze fundamentals, gather data to compare with the medical history, before she can make the right call.

Nonetheless, many investors today seem overly focused on how the market appears, as reflected in the questions they keep asking:

“What is this price action telling you?”

“What are other investors asking you about?”

“How are other people positioned?” or, “What’s the current sentiment?”

If these lines of inquiry sound familiar to you as a means of diagnosing portfolio performance and/or strategies, you may be asking the wrong questions. Looking at the price, or external appearance, and using that as the basis for forecasts rather than the fundamentals can lead you to the wrong conclusions.

Asking Better Questions

So what should investors be asking their advisors or portfolio managers? Here are a few questions that come to mind: What is the growth in earnings implied by today’s price? How has your view of that trajectory changed this year? Which areas of the market may show accelerating growth in cash flows? What is the future value of all cash flows discounted back to the present? How have your assumptions about growth or rates changed recently?

These are the types of questions that I haven’t been hearing from investors in the past month. It has been rare to attend an investor meeting that hasn’t been filled with the words “positioning” or “sentiment.”

Investors should stop worrying for a bit about how the market appears and focus on what it’s feeding on. Our view is that the earnings outlook for the S&P 500 for the next two years is pretty similar to what it was when the market was at its lows in mid-February. We continue to project about 4% per-year-earnings growth through 2017. Should the recent price action alone alter our view of corporate earnings growth? We think the U.S. consumer is in pretty good shape, with confidence, delinquencies, jobs, housing, and debt obligations all in reasonable shape.

Considering the Macro Outlook

In our view, the biggest wildcards are financials and energy. What’s in the price of the S&P 500 right now? The market level today implies a multiple of 16 times average price-to-earnings a year from now, on earnings that will likely be 8% higher two years from today. That puts the S&P at roughly 2050. The multiple on earnings has fattened up a lot in the past two months; however, we don’t believe the outlook for earnings has really changed very much.

When the market rallies for a couple of days and alpha generation has been this poor, the chase always begins. People often eat more when they are “drunk.” Given the broader context of the “binge” since the February lows, our advice is to be a bit more cautious on meaningful U.S. equity market appreciation from here.